Online cosmetics force big houses to act

Global cosmetics house Estée Lauder has hired management consultants Bain & Company to analyse the impact of price harmonisation as department stores David Jones and Myer step up pressure on suppliers to reduce the price premium paid by Australian consumers.

Estée Lauder’s major rival, L’Oréal, has been reducing prices on brands such as Kiehl’s and Lancôme by 20 per cent to 40 per cent to reduce the leakage of sales from department stores to online retailers.

However Estée Lauder, which also owns Clinique, M.A.C., La Mer and Jo Malone, has so far resisted pressure to reduce prices in Australia.

As a result, some popular Estée Lauder products such as Re-Nutriv and Clinique cost 60 per cent to 100 per cent more here than they do on Estée Lauder’s US e-commerce site.

“Estée Lauder was refusing to crack and they must have been losing market share as a result,” said one industry source. “The substantial price decreases for L’Oréal would have been impacting on Estée Lauder products.”

Myer and David Jones are pressuring cosmetics houses to reduce prices to slow the leakage of sales to online retailers. Commonwealth Bank analyst Andrew McLennan estimates that cosmetics account for about 15 per cent of sales at Myer and David Jones but online penetration has reached 20 per cent and is growing rapidly as consumers seek cheaper prices at pure-play online retailers such as StrawberryNet and online stores of overseas department stores.

“There is an enormous price disparity between Australian department stores’ pricing and online retail competition,” Mr McLennan said in a report late last year.

More recently, a survey by Bain & Company in March found that 65 per cent of Australian consumers were not prepared to pay any premium to buy locally and will turn to overseas websites to find the cheapest price.

The survey found that 24 per cent of responding consumers were prepared to pay 5 per cent more to support local retailers but only 1 per cent would pay a 15 per cent premium.

Retailers believe consumers may be prepared to pay a 10 per cent to 15 per cent premium to buy locally. But if the price differential is higher they risk losing sales.

Estée Lauder Australia managing director Terry Little is overseas and unavailable for comment and Bain & Co’s Australian retail partner, David Zehner, was unable to comment. However, it is understood that the company has engaged Bain & Co to advise it on the best way to respond to pricing pressure.

As part of the review, Bain & Co is likely to look at whether Estée Lauder should retain its Australian distribution division or move to a direct importing model to reduce costs.

Global companies have previously argued that geographic price differentials reflect the small size of the Australian market and local distribution and marketing costs.

Price comparisons by The Australian Financial Review show that Estée Lauder’s Re-Nutriv Ultimate Lift Age Correction serum (30 mls) costs $410 from Estée Lauder’s Australian online store compared with $US210 on the group’s US website and $242 on au.strawberrynet.com.

Idealist skin correction serum (50 mls) costs $150 on Estée Lauder’s local site, compared with $US85 on the US site, and Clinique SuperDefense SPF 25 costs $90 on Estée Lauder’s local site and in Myer, compared with $US44.50 on Estée Lauder’s US website and $58.50 on au.strawberrynet.com.